Does Debt Die With You?
What happens to debt when you die?
When you pass, your unpaid debts are not forgotten. It’s the executor of your Will that is legally obliged to distribute any remaining debt among rightful creditors. But be warned – if a debt exceeds the value of an estate it can leave those behind unable to make payment, provided all steps were taken correctly in administration and distribution processes prior.
Leaving behind a Will is an excellent way to make sure your estate passes on as you wish, but if debts are part of the equation it might be wise to appoint a professional executor. This person can help ensure any outstanding debt does not unexpectedly trickle down and burden those closest to you after death.
You may have spent a lifetime working hard to create a secure future for your family, but in some cases when death approaches there is still debt left. Paying off as much as possible prior to passing on can make things easier and less stressful for those you leave behind – the rest depends upon who manages the process of administering your estate after you’re gone. For reliable advice on this complex situation, our guide could be beneficial or alternatively it might pay dividends getting in touch with an experienced probate solicitor.
When are creditors notified of a death?
The executor of the estate must make a reasonable effort to notify potential creditors of the death of their loved one.
When a death is announced, creditors have two months to file claims against the estate. If no notice of death has been issued and the executor passes out assets from an estate within six months, they and its beneficiaries may be held accountable for any debts left unpaid. Therefore it’s best to wait until after those 6-month period before carrying on with proceedings related to distribution in order to avoid potential liability issues down the line.
It is important to do a thorough search for resources, such as insurance, that can be used to pay debts on an estate before deciding if the debts are payable.
What happens if an estate is unable to pay its debts?
If the executor of an estate discovers that the estate is unable to pay its debts they can apply for it to be declared insolvent, which is similar to bankruptcy.
In England and Wales, they should apply to the court for an Insolvency Administration Order. The estate is passed to a Trustee-in-Bankruptcy who has more powers to claim money that can be used to pay debts.
Executors in Scotland may apply to the Accountant of Bankruptcy for a process known as sequestration. Any close relative with legal authority is allowed to do so, and creditors owed over £3,000 by an estate can file for it through court action. Upon approval, custody of the estate transfers from its executor or owner to a trustee appointed by the government.
How are debts paid on an insolvent estate?
The Administration of Insolvent Estates Act (1986) specifies an order of payment for debts, to ensure that the money that the estate does have is paid to the highest-priority creditors first. Reasonable funeral expenses are usually exempt from this, and can be paid before the lowest priority debts.
If this process is handled correctly and it becomes clear that the money in the estate, or that can be claimed by it, does not cover all of its debts then the ones that aren’t payable can be written off and no one else is liable to pay it.
If the person who has died in debt gifted a large sum of money to someone who they wanted to inherit their estate before their death this might be interpreted as an attempt to avoid the debt. Creditors might be able to apply to the courts to have the beneficiary pay the money to them.
Who can help pay debts on an estate?
If you do become liable for a debt because of incorrect administration of an estate, or because you are solely responsible for paying bills you previously shared with a loved one who has died, a debt adviser can help you.
A debt advisor can explain your legal obligations, rights and any options you might not have considered before. Make sure that whatever action you take is the most effective option for you and your family, and do not let yourself become pressured into making any decisions by creditors who might mislead you.